Even after Lehman and AIG collapsed a year later -- and Europe's economy crashed into slump -- it remained an article of faith in Berlin, Paris, and Rome that this was just fall-out from the Anglo-Saxon casino.

Few understood that the `China Effect' had engendered credit bubbles everywhere, and that Europe's variant was even more pernicious because euro-banks were more leveraged, with much greater liabilities, and the structure of EMU concentrated the damage on weaker states with no policy defence against sovereign collapse.

US Treasury Secretary Tim Geithner must have felt a twinge of Schadenfreude as he exhorted EU finance ministers in Poland to rescue their banks or face "catastrophe". The Germans and Austrians barked back at him, of course, but at least debate is joined.

Europe cannot blame America any longer, and if the US really were to slash spending right now -- as Germany's finance minister seems to want, like the disastrous Bruning, circa 1931 -- EMU would be in even deeper trouble.

In my view, Germany's austerity nihilism will precipitate a dramatic policy shift by the US over coming months. The risk -- or solution -- is that Washington will write off Europe as irretrievably hopeless and re-order the global landscape. The US will not let free-riders exploit is its precious stimulus forever. It may seek to form a global growth bloc, open only to stimulators. And woe betide Germany. But that is a column for another day.

By the "China Effect", I mean the Asian trade tsunami that flooded Western markets and deflated the price of everything from shoes and clothes, to washing machines and solar panels. This seduced Western central banks into running uber-loose monetary policies for twenty years, and disguised the build-up of dangerous asset bubbles.

It was coupled with Asia's "Savings Glut", as Ben Bernanke calls it. The rising powers accumulated $10 trillion of reserves, either because they were holding down currencies to gain trade share, or because their economic and social structure was geared towards mercantilism and excess output.

China's consumption rate has fallen to 36pc of GDP from 48pc in the late 1990s. Academic libraries are bursting with PhD papers trying to explain why. Some posit the welfare theory, arguing that aging citizens must save for a future with almost no pension or health provision; others that China has frantically leveraged an infrastructure and manufacturing boom to buy time and contain the wrath of 200m migrant workers.

Whatever the mix: there is simply too much global investment, and too little consumption. The system is out of joint. It does not feel like the 1930s because we are richer in the West, with a better safety net, and emergency stimulus has so far cushioned the effects, but Bertil Ohlin, John Maynard Keynes, and Irving Fisher would find it unnervingly familiar.

The Savings Glut flooded global bond markets, especially the EMU markets as central banks rotated into euros. Hence the collapse in yields during the long bubble. Pension funds were forced to search for better return in ever riskier countries and assets to match their liablities.

This is why Greece was able to borrow for ten years at 26 basis points over Bunds, and Spain at four points of spread at the end of the boom, and why Italy's €1.8 trillion public debt did not seem to be a problem. It hid all sins.

Capital was hanging from the lowest branches, almost free for all. America took it, Britain took it, Iceland took it (a lot), and Euroland took it.

Yet China itself must ultimately be a victim of this warped structure as well, and that is where we are in late 2011. Act III of the global denouement is unfolding. The world will have to lance the debt boils of Asia as well before clearing the way for another cycle of global growth.

The facts are simple. China dodged the Great Contraction of 2008-2009 by unleashing credit on a massive scale.

Zhu Min, the IMF's deupty chief and a former Chinese official, said loans had jumped from 100pc of GDP before the crisis to around 200pc today -- if you include off-books financing from letters of credits, trusts, and such like.

To put this in perspective, a study by Fitch Ratings found that credit in America rose by just 42pc of GDP in the five-year period before the housing bubble popped. It rose by 45pc of GDP in Japan from before the Nikkei cracked in 1990, and 47pc before the Korean crisis in 1998.

Home construction is running at 10pc of GDP, about the same as Spain in the`burbuja' of late 2006, and much higher than in either Korea or Japan at any point during their catch-up Tiger phases.

"China's banking system is the largest, fastest-growing, but most thinly capitalized among emerging markets. Such a rapid run-up in leverage is a sign that the incremental return on credit has declined," said Fitch. The economic boost from each extra yuan of credit collapsed from 0.75pc to 0.18pc during the crisis and has yet to recover.

My impression from China's "Summer Davos" in Dalian is that Beijing's elite is less deluded about the risks than Europe's leaders were for so long.

"The whole world needs to lower its expectations from China," said Lee Kaifu, the country's software mogul. "There is an even bigger threat than a global double-dip, and that is a prolonged recession with no growth and very limited policies to fight it. We are already in it."

Cheng Siwei, head of Beijing's International Finance Forum and a former vice-president of the Communist party's Standing Comittee, said China is entering a "very tough period" as growth runs into the inflation buffers, paralysing the central bank.

"The inflation rate and the growth rate are conflicting with each other: it is very troubling," he said. China faces the sort of the incipient stagflation that hit the West in the 1970s.

Matters have reached the point that even a light tap on the brakes by China's central bank -- through credit curbs (deposit rates are still minus 3pc in real terms) -- is already threatening a hard-landing.

Dr Cheng said local authorities had built up $1.7 trillion in debt, mostly using arms-length finance vehicles. This is coming back to haunt. "The tightening policy is creating a lot of difficulties and causing defaults. This is our version of subprime in the US, and the government is taking this very seriously," he said.

Whether the housing market will also set off a chain of defaults is the great question dividing analysts. "Decidely bubbly," is the IMF's politically-correct view. Its own data shows that price to incomes ratios range from 16 to 22 in the Eastern cities of Shenzen, Shanghai, Beijing, and Tianjin, multiples of the worst extremes in the very tame US boom.

Caixin Magazine reports that Guangzhou R&F Properties is slashing prices by 20pc, and other big developers may soon follow.

China has not abolished economic gravity. Its policy of yuan suppression against the dollar and euro has been impossible to sterilize, leading to an imported credit bubble of epic proportions. Its export-led strategy has left it with a deformed economy that relies on perma-demand from exhausted debtors in America and Europe.

As China premier Wen Jiabao said in Dalian, "China's development is not yet balanced, coordinated and sustainable." The next five-year plan is a breakneck switch towards a domestic growth. Bravo, but awfully late.

China is acutely vulnerable to the second leg of depression in the West -- should that occur -- and cannot conjure a second rabbit out of the hat. This will not stop the rise of China as the great force of 21st Century, any more than America's jolting upset in 1930 stopped US ascendancy.

Yet economic history has taught us two iron-clad rules. There is no escape from credit hangovers, and surplus trading powers suffer just as much as deficit states -- if not more --once Kondratieff slumps turn really serious.